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Supplies: 2 bottles of wine 1 laptop My college friend Laura, who once helped me climb up a concrete pedestal in order to dress a Civil War statue in a Hawaiian T shirt...
...first three months of the year alone. But Gradante says things really unraveled in the past month or so, as investment banks, feeling a capital pinch, started to require that hedge funds pay back their loans. The funds typically borrow money to buy stocks or bet against them in order to increase their returns. Hedge funds were then forced to sell their positions, often at a loss, in order to pay back what was owed. What's more, many investors began getting nervous and pulling their money out of the funds. Those redemptions have forced managers to sell as well...
...order to deal with nervous investors and the unpredictable markets, many hedge funds have recently gotten a lot more conservative. David Kostin, an analyst at Goldman Sachs, estimates that hedge funds have moved as much as $400 billion of their assets into cash. Cohen's SAC Capital, which is down 9% this year, has reportedly put half its fund, or $7 billion, in cash. The move to cash makes sense, says Gradante, for the current market. But it may hurt funds over the long haul. "If stocks rebound rapidly, like they did on Monday," says Gradante, "these funds will continue...
Most of all, the amygdala loathes unpredictability of the kind we are currently enduring. Lab experiments with rats and humans show that both species prefer predictable electric shocks over unpredictable shocks. That's because, on a normal day, the brain works by following shortcuts. We recognize patterns in order to make split-second judgments about what we are seeing. Shortcuts are ruthlessly efficient, which is important for an organ that only uses about 40 watts of power per operation. But the more uncertainty we face, the more shortcuts our brains use. And the shortcuts lead to a slew of predictable...
This grim outlook presents some particularly tricky challenges to those in charge. In previous downturns, such as the early 1990s slump, governments typically ramped up state spending in order to offset the drop in business activity. But this time, the gigantic cost of bank bailouts will leave national treasuries with little room for maneuver. Indeed, the bailout plans - under which stricken banks will receive direct injections of taxpayer money to strengthen their capital base, while governments provide guarantees aimed at getting banks to lend to one another again - may well throw government finances seriously out of kilter...